How TiVo Confronted the Disruptor’s Dilemma

Bottom Line: Upstart firms that want to break into an established sector often must collaborate with the very power brokers they seek to unseat.

When TiVo burst on the scene in 1999, its digital video recorder (DVR) set in motion a profound transformation of the TV industry and the public’s viewing habits. It allowed people to easily record sports, other live events, and entire seasons of shows to watch at a later time, at the touch of a couple of buttons, and without a videotape. This ended the long-standing practice of networks dictating when people had to watch programs and how much companies had to pay to advertise during certain precious time slots. The fact that the DVR enabled viewers to fast-forward quickly through commercials also led many companies to question how much they should be paying for TV ads and find other ways to reach consumers, creating a trickle-down effect for companies that revolved around the advertising dollar.

In this way, TiVo was a prime example of a disruptive innovation — a game-changing technology, product, or business model. A disruptive innovation is financially unviable for incumbents but can provide a valuable foothold for new entrants — the few new entrants, that is, who survive these David-versus-Goliath showdowns, which typically pit startups with few resources against well-established brands.

Disruptors face a fundamental paradox. To survive and grow, they need the support of the very incumbents whose industry they seek to revolutionize. After all, a TiVo box wouldn’t have been much good without a compatible TV or cable system to hook up to. But established firms have every reason to resist or even retaliate against an upstart firm that threatens their way of doing business.

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The authors of a new study dub this the disruptor’s dilemma, and use the case of TiVo to illustrate how new entrants must strike the proper balance of cooperation and competition — “coopetition” — in order to establish themselves and thrive. And regardless of the long-term fortunes of TiVo, there’s no question the company achieved “Kleenex”-like brand-name recognition for a time, becoming synonymous with the idea of easily and digitally recording something to watch later, and fundamentally changing the TV industry in the process.

The authors studied scholarly articles and media reports documenting TiVo’s rise, and examined the company’s patents, SEC filings, and FCC reports. They also interviewed seven current and former senior executives at TiVo (including the company founder, CEO, and CFO) about their strategy. In addition, the researchers accessed 24 interviews of other TiVo executives between 2002 and 2012. In charting the chronology of TiVo’s entrance and evolution within the TV ecosystem, they discovered three distinct phases, and found that TiVo’s responses during each phase can hold lessons for other would-be disruptors.

Phase 1: Overcome challenges in disrupting the existing ecosystem. TiVo introduced itself by touting its ability to deliver benefits to everyone down the line. “Build it and they will come” was how one TiVo executive framed the strategy. But as early as 2000, the New York Times Magazine was describing “how new television technology could destroy advertising as we know it.” TiVo, however, offered important concessions to incumbents — omitting a commercial skip button (a noted feature of competitors’ platforms), for example, and working with content providers on copyright issues — and went on a charm offensive. “We were perceived by the industry as relatively good guys among the disruptors,” TiVo’s cofounder told the authors.

Persistence was also key at this delicate stage. “Early on, the networks and advertisers couldn’t decide whether to sue us or buy the company,” another executive observed. Despite company representatives being tossed out of a meeting or two, TiVo’s early leaders eventually secured investments from a handful of established media, mostly because these players wanted to keep tabs on the nascent technology, be alert to potential threats, and influence its development to their benefit, if possible.

Phase 2: Make continual adjustments. As TiVo grew, it experienced bumps in the road. Several networks refused to air an early TiVo commercial that depicted “panicked” television executives in a bad light, and this awkward attempt at generating buzz meant it took the company “a while to repair these relationships later on,” one TiVo leader said. Initial attempts to partner with DirecTV and Netflix also fell apart.

To survive and grow, disruptors need the support of the very incumbents whose industry they seek to revolutionize.

To address these “coopetitive” tensions, TiVo hired managers with deep ties to the media industry, forged relationships with particularly forward-thinking executives at other companies, and formed collaborative ventures with TV networks, the authors found. But the company also had to balance its relationships with subscribers, who flocked to TiVo to avoid commercials, and advertisers, who very much wanted their commercials to be seen. In an example of how the company tried to get multiple sides on board, TiVo introduced a “tagging” feature that displayed a brand’s logo even if subscribers fast-forwarded through a commercial. The company also had to deal with a more conventional problem: imitators. Cable and satellite providers rushed to produce generic DVRs, and telephone companies sought to take advantage of the changing landscape by breaking into TV. To ward off such challenges, TiVo filed a series of lawsuits, even while vowing to collaborate with incumbents that didn’t infringe on its intellectual property.

Phase 3: Position yourself within the industry. Making on-the-go adjustments quickly took TiVo in new directions. In response to the pressure from generic DVRs, for example, TiVo tried to broaden its appeal by releasing new generations of more sophisticated devices that could connect to PCs and smartphones. Partnerships with Amazon, the New York Times, and the NBA played to subscribers’ desire for more content.

The authors’ analysis also showed how TiVo focused on developing and perfecting its intellectual property: The company’s portfolio increased from just 33 patents in 2000 to 238 in 2011. TiVo also cross-licensed key patents from established players in the market, continuing its tradition of coopetition. And in the process, the disruptor became an established brand.

“We evangelized to everyone in the industry,” TiVo CEO Tom Rogers told the authors. “We explained that we were not trying to destroy their business models.… We weren’t just a technology company but a hybrid trying to develop both media capital and technology capital.”

In the end, disruptive innovations such as TiVo are double-edged swords. Although these breakthrough products or services have the potential to create new markets, they can also destroy the existing ecosystem and upset the traditional relationships among incumbents.

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